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Len Burman of the Tax Policy Center and other tax experts frequently bemoan the horrendous complexity of the AMT and its potential to trap unwary taxpayers. But until now, we have not had data on how many taxpayer errors the AMT causes.
We now have a first glance at how many taxpayers get confused. The Treasury Inspector General for Tax Administration (TIGTA) has just released a report, based on a review of tax returns filed in 2006 that includes data on the number of taxpayers who misreported AMT liability, according to IRS computer checks. The TIGTA report shows that 61,000 taxpayers who owed AMT did not report it on their returns, Another 165,000 under-reported their AMT liability. I know one of those 61,000 -- a Ph.D. in biochemistry who is both scrupulously honest and not math-challenged.
If these erroneous returns are almost entirely from tax year 2005, when just under 4 million individual taxpayers owed AMT, roughly 1.5 percent of these taxpayers failed to report AMT and another 4.2 percent underreported AMT liability. Yes, the percentages seem fairly low, But one reason there aren’t more errors is that most current AMT payers use either paid preparers or tax software that automatically calculates AMT liability because their taxes are complicated even without AMT. If Congress doesn’t keep patching the AMT annually to limit its reach, a much broader and more representative swath of the population will have to pay the AMT and the percentage with reporting errors will rise sharply. The saving grace is that nine out of ten taxpayers now use preparers or software; with electronic or accounting assistance, most taxpayers will still probably get their AMT numbers right.
If computers can do our taxes for us, do we need to worry about complexity? Absolutely! As citizens in a democracy, we should be able to understand how the taxes we must pay depend on the income we receive and the deductions and credits we can claim. We don’t want to be hit with incomprehensible extra taxes or have to incur costs to plan around the extra taxes. We need to know how an additional hour of work affects our take home pay and whether we can really use the deductions the tax law seems to provide. Computers can simplify our tax calculations and reduce errors, but they are no substitute for a fair and transparent tax system.
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